Breakingviews - Hong Kong opens doors to far-from-super governance

HONG KONG (Reuters Breakingviews) - Hong Kong’s stock exchange has unveiled rules to host companies with super-voting stock. The system will be great for founders, but not so super for other investors.

Hong Kong Exchanges and Clearing, the bourse’s parent company, on Tuesday detailed the new regime, which will give tech bosses outsized control compared to their economic stakes. In an eleventh-hour reversal, weighted voting rights will now be extended to owners who have majority ownership, so long as the public hold at least 10 percent of the votes, significantly widening the scope of the scheme.

The owner of the Hong Kong Stock Exchange is dropping its historical adherence to the one-share, one-vote principle in a bid to stem the flow of Chinese giants like Alibaba and Baidu to rival U.S. venues such as Nasdaq. That seems likely to succeed, while at the same time enabling shoddy treatment of outside shareholders.

The rules are also awkwardly subjective. They are meant to lure “emerging and innovative” companies, but the definition of this concept is woolly, giving the exchange leeway in who it picks or rejects. And while HKEX says only companies backed by at least one “sophisticated investor” can list under this regime, it has yet to define this idea.

Further weakening could be on the cards. HKEX will also consider whether to let corporations hold dual-class shares, too. This would let conglomerates keep control of spun-off subsidiaries. That does not chime with the original rationale for the plan, which is to give entrepreneurs free rein to run their businesses.

Investors may take some respite in stronger safeguards than those seen in New York. Companies must still meet higher minimum requirements for annual sales and market capitalisation. And at least non-voting shares, as seen at U.S. messaging company Snap, aren’t allowed. But unlike in America, investors in Hong Kong cannot really turn to class-action lawsuits to protect their rights. That gives Hong Kong an uncomfortable edge in its race to the bottom.

Breakingviews

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